Surviving in the Reverse Mortgage Industry

Friday, 09 July 2010 07:43

You have heard all the dire predictions at NRMLA conventions concerning the sustainability of reverse mortgage providers.  But, don’t throw in the towel just yet!  There are new companies and concepts that have arisen to help the new, small or struggling entities that offer reverse mortgages.

For roughly18 years, the number of reverse mortgages and the companies writing or servicing them remained small.  The pioneering brokers who chose to write only reverse mortgages found themselves in a pretty select niche in the mortgage industry.  For the most part, everyone in the industry was doing pretty well until 2006, when reverse mortgages became more profitable.  When this happened, the secondary market collapsed, and trade groups (like NRMLA) began promoting RMs as an additional source of income to existing forward brokers.  This led to exponential growth in the companies offering RMs and the number of loans written grew to over a hundred thousand (100,000) a year.  Those numbers sound great, except for the brokers in the industry saw their portion of the market share drop to a single digit or worse.  Now, 90% of all reverse mortgage originating companies average four or less endorsements through HUD per month.   

The new origination entities writing reverse mortgages have become overwhelmed by the new rules, regulations and scrutiny placed on them.  What they need to do is take a hard, honest look at their present and potential production and decide if they would be better served by staying the course, using contract staffing support or joining a bigger entity.  Sadly, some of the best RM brokers have been forced to close shop.  For some, the income is sufficient to support the current staffing levels, so staying the course is the best viable answer.  If, however the income cannot support the needed staff requirements, then contracting out all or most of the support staff makes sense.  But, if the production levels still do not support the decision to continue as a stand-alone company, or the climate for that broker is too toxic, the best decision would be to join a lender.

Toward these ends, two companies have developed business models to help the brokers and small banks with these options.  Experienced reverse mortgage professionals from all aspects of the reverse mortgage industry staff both companies and help to provide brokers with distinctive options.

One company has chosen to work with small banks and brokers to provide a processing service that allows for greater commercial success.  This is accomplished by an efficient, dedicated processing staff whose only concentration is on quickly and properly taking an application to closing.  Having the RM processing outsourced can work to relieve the bank staff from learning and following contradictory rules and procedures.  Because banks are experiencing the same difficult time writing enough business to support a processor, contracting out the processing allows the banks keep these costs in line.  For the banks that have only one loan officer dedicated to reverse mortgages, they have required the LO to process loans as well.  Contracting out the processing duties allows the loan officer to work exclusively on selling. 

This particular company has created a support system that, in substance, allows a broker to utilize the necessary support staff without having them on the payroll.  “We created our company to provide the support that small brokers and banks need to stay both competitive and compliant in this difficult environment,” said Dennis Chanski, one of the company’s partners.  Compliance, licensing, training, sales support, and other such positions whose actions are not unique to each company are shared.  For example, the compliance officer would perform the same duties for numerous companies, since the issues that arise are redundant.  The same can be said of their licensing coordinator, Human Resource department, sales trainer, etc. Because of this, independent brokers may be competing with each other in the same territory. 

The second company is a lender that allows brokers to operate their business under the umbrella of a bigger firm as employees.  The income is increased by the elimination of most of the fixed costs of running the company, as well as greatly decreasing other operating expenses.  The small broker business model that thrived during the boom isn’t able to compete as effectively with the major players in a more normal market due to increased compliance responsibilities and the collective expense redundancies of all the brokers.  “To compete at a higher level, brokers gain efficiency by combining their talents and resources with other brokers sharing a common goal,” says Mike Gruley, V.P.  Brokers and entire staff can operate as their own branch under this model.  This option is being considered by brokers, as many are beginning to believe that mortgage brokers will be greatly diminished over the coming months and years, and that the benefits of being a lender are not just convenient and cost-effective, but necessary for survival.  According to Gruley, “We are seeing necessary and effective consolidation throughout the lending industry, and the broker channel is no exception.”

Below are some questions that brokers should consider when looking at their options.

Q:  What is the description of a typical candidate that joins or becomes a client of these companies?

A: For the first company:
            1.  Mortgage brokers who wish to continue running their own shop, but are looking for support in running their company and wish to continue their focus on building their company’s sales.
            2.  Successful RM originators who wish to open their own mortgage company. ARS staff would help the originator through the process of getting approved and staying in compliance.  In addition to their reverse mortgage services, ARS has a division that helps small business with payroll, workman’s compensation, insurance and other small business back room needs.
    3. Small or community banks that are looking for either processing support or help in adding reverse mortgages to their product mix.
 
For the second example, there are basically two typical candidates:
1.      A mortgage broker owner who no longer wishes to shoulder the financial risks, legal risks, and the management of a business, and wishes to focus more on the sales and recruiting aspect of the industry. 
2.      A successful RM originator that works for a mortgage brokerage firm that feels that his/her future success may be limited by working for a broker as opposed to a lender.  This is especially true of branch managers who control a team of LOs and may feel the same way.  Those branch managers are at risk of losing valued team members and the subsequent overrides he/she makes from them.

    

Q:  What are the benefits of joining a company that allows brokers to operate their business under the umbrella of a bigger firm?

A:  A well capitalized lender effectively eliminates many of the burdening financial issues through an economy of scale.  Infrastructure costs are spread over a combined larger volume of loans, re-creating the higher margins for both the company and the LOs alike.  No more worries about employees, audited financials, rent payments, etc. Lenders can just worry about production and getting paid.  In fact, even at low volumes, they make money.  Most importantly, they eliminate the risk of losing money at times of low volume.  In fact, for brokers producing less than 15 loans per month, both LOs and managers would typically make the same or more under the umbrella.  That would not be true for an independent company in most cases.

The loan officer working with a lender such as this can benefit with:
         
          + In-house underwriting (speed and access)
          + No YSP disclosure
          + If YSPs get banned or restricted, LOs would likely not be adversely affected
          + Not forced to use bad AMCs
          + Only one LO to learn and use
          + Share marketing materials, projects, databases, etc. (scale economies)
          + Considerably higher commission splits than mega lenders/banks
          + A division team that is exclusively committed to RMs

Q:  Why should a broker become a client of a company that contracts out the RM processing?

A:  All brokers have important decisions to make in some form or another.  Consolidating is just one of those choices.  They either have to commit themselves to continuing as a broker with all of its rewards and punishments, or make changes that will suit their individual needs and comforts in another way.  There is no right answer, however, in order to ensure their staff is well trained, compliant, properly licensed, and successful, brokers can look to this company for that support. 

Because states are now going after brokers in ways that they never have before, many of the owners now have to worry about issues that were once minor considerations, but are now violations that could shut them down.  Advertising must be done with an eye towards compliance.  A survey of 50 reverse mortgage web sites found that almost all had violations that result in severe fines.  One law that brokers are not aware of is one that states that any site that they have a link to must come with proper disclosure.  A link that does not come with the proper disclosure could add liability to the broker.  While it is understandable that brokers don’t have the time to stay current on all the laws, they are not relieved of the responsibility and more importantly the liability that comes with the territory.

Q: Why should a bank or credit union use a company such as the first example when entering the reverse mortgage field?

A:  Small banks and credit unions have limited time and resources to open up a new sales unit effectively.  The staff will work with the bank’s employees to rapidly bring them up to speed on all of the aspects of reverse mortgages.  

Q: How could a bank or credit union work with a company such as the second example to enter the reverse mortgage field?

A:  By working with an experienced, exclusive reverse mortgage lender, banks and credit unions can provide reverse mortgages to their customers and long-time members without the typical capital and labor investment required to be a full scale reverse mortgage originator.  This private label model maintains consistent branding for the bank/credit union and it prevents customer runoff to other competing depository institutions.